Rising Energy Costs Drive Input Price Increases
Construction prices rose in August compared to the previous month, indicating “excess inflation” over the coming months, according to an Associated Builders and Contractors report.
An analysis of the U.S. Bureau of Labor Statistics Producer Price Index data found that construction input prices and nonresidential input prices both rose 1.5% in August. These are up just 0.2% from a year ago.
Rising energy prices drove overall price increases in August, the association explains, with crude petroleum prices up 8.9% and unprocessed energy materials prices rising 5.4%.
“Anyone who thought that excess inflation would simply go away later this year has been rudely awakened this week,” said ABC Chief Economist Anirban Basu. “Yesterday’s consumer price data and today’s PPI release indicate that price growth continues to be problematic. While energy prices will grab headlines, items like concrete and switchgear also exhibited inflationary tendencies in August.
Other than fuel, prices for most major construction inputs were stable or declined in August. Indexes for cement and architectural coatings such as paint were flat, while there were decreases of 0.2% in the index for plastic construction products, 0.5% for steel mill products and 0.4% for gypsum building materials.
“There are many implications for construction contractors, including the fact that persistently elevated inflation will keep interest rates higher for longer,” said Basu.
“ABC has been predicting this for months. With labor costs still rising, consumers spending aggressively, oil-producing nations limiting output and global supply chains being reorganized, there is reason to believe that future readings will also demonstrate excess inflation is here to stay.”
According to an analysis of the data by the Associated General Contractors of America, officials noted that most other commodity prices were subdued. However, a recent AGC survey showed contractors continue to experience widespread problems finding qualified workers and the costs associated with those shortages.
“The steep climb in diesel prices since July is a reminder that construction cost worries have not gone away,” said Ken Simonson, the association’s Chief Economist. “An even great challenge for most contractors is finding enough qualified workers to complete the many projects available to work on.”
Previous Month’s Prices
Construction input prices were unchanged in July compared to the previous month, according to the ABC’s analysis last month. Nonresidential construction input prices reportedly fell 0.1% for the month.
Overall, construction input prices were 3.1% lower than a year ago, while nonresidential construction input prices were 2.7% lower, ABC explained. However, prices had increased in all three energy subcategories. Natural gas prices were up 11.0%, while crude petroleum and unprocessed energy materials prices increased 8.4% and 8.0%, respectively.
The AGC analysis found that while contractors are finally seeing some relief from recent supply chain problems and price escalations, the competitive market means key materials are still very hard to find.
According to the release at the time, the impacts from the pandemic and Russia’s attack on Ukraine had slowed, but long lead times reportedly remain for electrical equipment and construction machinery. Cement, lumber, plywood and asphalt coatings are some of the materials showing “persistent” price increases.
The analysis also reportedly found that contractors’ bid prices fell by 1.4% last month. That said, officials continued to express concerns over the new Buy America requirements of the bipartisan infrastructure law.
Recent Backlog, Confidence Report
Earlier this month, the ABC found that its Construction Backlog Indicator declined to 9.2 months in August, down 0.1 month. Additionally, according to the survey conducted from Aug. 21 to Sept. 6, the reading is 0.5 months above this month the year prior.
The association reports in its press release that the backlog decreased on a monthly basis for all categories of company size except for those with more than $100 million in annual revenues, while only the smallest two revenue categories have higher backlog than in August 2022.
Sectors experiencing an increase in backlog included:
However, the backlog also witnessed decreases in several sectors, including:
The ABC’s Construction Confidence Index reading for sales, profit margins and staffing levels moved higher in August. All three readings remain above the threshold of 50, indicating expectations of growth over the next six months.